Irish Alternative Funds Industry Update

The AIFMD was published in the Official Journal of the European Union on 1 July 2011. That publication sets the final deadlines for implementation of the AIFMD and 22 July, 2013 is now officially the date (under Article 66) by which Ireland and all other EU Member States shall adopt and publish the laws, regulations and administrative provisions necessary to comply with the AIFMD. The AIFMD will be complemented by Level 2 implementing measures which will provide for more detailed regulations. The European Securities and Markets Authority ("ESMA") is currently working on technical advice on the implementing measures with a deadline for the issue of ESMA’s technical advice currently set for 16 November 2011.

Prime Broker Guidance Note

On 1 July 2011, the Central Bank issued a revised guidance note 2/11 on professional collective investment schemes: appointment of prime brokers and related issues. The amendments, whilst minor in nature, are nonetheless welcome developments for the industry. They include:

clarification that, in the case of a professional investor fund ("PIF"), cash delivered by the PIF to the prime broker, which is not protected by client money rules or other similar arrangements to protect the PIF against the insolvency of the prime broker, is to be taken into account in calculating the 140% limit of indebtedness of the PIF to the prime broker which determines the amount of assets that may be passed from the PIF to the prime broker;

an extension of the circumstances in which the prime broker may return cash in lieu of the same or equivalent assets to include a circumstance where the prime broker has an "inability to return assets"; and

the minimum credit rating requirement of a prime broker, or its parent company, in order to provide services to an Irish domiciled PIF or qualifying investor fund ("QIF") has been amended from A1/ P1 to A-1 or equivalent.

The Central Bank has advised the industry that it does not intend to consider any substantial amendments to the revised guidance note while the appointment of prime brokers by alternative investment funds remains under consideration in the context of the AIFMD. We would be happy to provide further details and discuss the amendments in full upon request.

The ISE have realised that regulatory reforms, specifically the Dodd-Frank Act, may result in a downgrading of prime brokers and as a consequence, prime brokers being unable to meet the current SCR requirement. The ISE have therefore amended the SCR requirement to remove the reference to the long term credit rating of a minimum of A2 for long term debt from the credit agency Moody's or 'A' from Standard and Poor's or Fitch and only retain short term credit ratings.

Rule 7.7 (a) now states that a prime broker must meet the following SCR which is in line with the Central Bank of Ireland requirements:

A minimum of P-1, A-1 or F-1, respectively for short term debt from the credit agency of Moody's or Standard & Poor's or Fitch or

A minimum short term credit rating of A2 or P2 (or equivalent) from the credit agency of Moody's or Standard & Poor's or Fitch provided that the maximum exposure of the applicant to the prime broker is limited to 40% of the Net Asset Value of the fund.